This week has not been set for the US currency. It fell due to the probability of disappointing macro statistics and the short-term strengthening of the euro. However, it does not give up, trying to leave the price hole.
On Tuesday, the US dollar collapsed from a 19-week high. It is declining for the second session in a row, unsuccessfully trying to stay above. There are several reasons for the decline – the expectation of the Fed's rate hike, increased cash flows at the end of January, due to which investors have to sell dollars and an increase in risk appetite. At the end of last month, the risk appetite in the markets increased significantly. The catalyst for this was the rebalancing of investors' portfolios and their move into protective assets.
American macro statistics provided temporary support for the US dollar. Last month, the index of business activity in the industry of the country declined to 57.6% from the previous 58.7% and analysts' expected fall of 57.5%. Currently, markets are waiting for signals from the European regulator, as the US has already did an action, marking the course for tougher monetary policy.
According to experts, the US dollar's decline was facilitated by market fears about a possible reduction in the gap between the ECB and the Fed. Some analysts suggest that the European regulator will raise rates before the American one. At the same time, the markets are not confident that the Fed will raise rates five times this year. It can be recalled that the US regulator has repeatedly had to change its plans. Nevertheless, the market is still counting on a five-fold increase in the Fed's rates, the first of which is expected in March. As for the ECB, it is still adhering to the ultra-soft monetary policy, refusing to raise rates this year.
The current situation helped the EUR/USD pair to rise, while the US currency remained under pressure. The strengthening of the euro became a powerful driver of trading, which was facilitated by Inspiring reports on consumer prices in Germany. Experts admit a reversal in the direction of 1.1300-1.1350. According to currency strategists, the next target of the EUR/USD pair will be the level of 1.1300. The formation of the bullish pattern "Morning Star", fixed on the chart on Tuesday, contributed to this. On Wednesday morning, the EUR/USD pair was hovering around 1.1274, approaching the specified level.
Currency strategists cite the flattening of the yield curve as among the reasons for the US dollar's current weakness. A flat curve is a sign of an impending recession, while an inverted curve indicates a recession in the economy. Economists estimate that the US yield curve is gradually flattening, while the yield spread between 2-year and 10-year bonds is narrowing (to a minimum since October 2020). This worries experts who see an analogy with December 2018, when the Fed completed its cycle of raising rates, increasing the rate to 2.5%. At this time, the regulator began to reduce the balance sheet, and it now aims to take similar actions. However, the result may not meet market expectations.
According to analysts, the flattening yield curve indicates that the debt market is counting on a solution to supply chain problems. If the issue is resolved, the Fed will not need an aggressive series of rate hikes. However, the market is worried that the rate hike will not allow the Fed to contain price pressure. It is possible that the "hawkish" position of the US regulator, faced with a similar position to the European one, will strike a spark in their relationship. This week's positivity will be the strengthening of the euro against the US dollar, which market participants expect.
